Bank of England turns more radical on bank terror

Central bankers’ speeches tend to be dry affairs. For this reason alone, Andrew Haldane’s latest thoughts on the financial crisis deserve attention. In a discussion about size in banking, the Bank of England’s executive director in charge of financial stability makes reference to the structure of al Qaeda, the limits of Facebook friendship, and the world domino-toppling record. Rhetorical flourishes aside, Haldane’s comments contain a serious message: regulators are thinking increasingly radical thoughts about tackling big banks.

Haldane is not in an academic ivory tower. If the Conservative opposition wins Britain’s general election, the Bank of England will become directly responsible for regulating the country’s lenders. Moreover, he has come up with some startling numbers. Using credit ratings to help quantify the implicit support that banks enjoy from the government, Haldane estimates that the UK’s largest lenders benefited from an average taxpayer subsidy of 55 billion pounds a year over the past three years. An alternative approach, looking at the relative funding costs of big and small banks, suggests the annual subsidy is worth 30 billion pounds.

The detail is less important than the size of these figures. None of the various bank taxes under discussion so far would come close: President Barack Obama’s proposed levy on bank liabilities, if applied to UK banks, would raise less than 4 billion pounds a year. Yet removing the implicit subsidy provided by taxpayers is perhaps the biggest challenge that regulators face.

So far, policymakers have concentrated on new rules to enable them to wind down even large, systemically important financial institutions. To some extent, banks are helping by drawing up “living wills”. If this succeeds, creditors will have to price in the possibility of banks being allowed to fail, and the implicit subsidy should disappear. Banks will face pressure from shareholders to justify their size. Some might even choose to break themselves up.

But if that approach doesn’t work, the other way to address the too-big-to-fail problem is to put explicit limits on banks’ size. Haldane is careful not to express a preference, stating that the debate about the future structure of the financial sector has only just started. But the challenge to Britain’s banks is clear. Having to stump up for a bank tax may not be the only consequence of their role in the financial crisis.

The relevance of this never ending banking debate, relative to the conundrum of extrication from this financial mess escapes me, as the spotlight is now on the Sovereigns and how they intend to deal with the insanely high level of private sector liabilities they have in their infinite wisdom assumed.

I thought this was interesting – from Andy Haldane’s biography on the Bof E website – ‘Before taking up his current role, Andy set up and headed the Systemic Risk Assessment Division within the Financial Stability area of the Bank from 2005.’ The Bank of England obviously thought that he was so successful at spotting systemic risk problems from 2005 -2009, that they decided to make him Executive Director, Financial Stability on 1 January 2009. I, in the meantime, despair! Maybe I am being too critical, but I have not been impressed with any of the recent talks given by Bank of England personnel. Haldane was right to bring up the subject of the benefit enjoyed by British banks of operating with either an explicit guarantee (RBS,Lloyds,Northern Rock), or an implicit guarantee ( Barclays,HSBC and possibly Standard and Chartered Bank) by the British government/people. But the figures he quotes are way too low given the size of these banks’ balance sheets!!!

[…] Measuring the cost of “banking pollution”…up to $200 trillion (Andrew Haldane) In this not-too-long speech, the Bank of England’s Executive Director for Financial Stability seeks to quantify the costs of financial crises, and argues banks should be broken up. Indeed. He notes that “it is possible that no amount of capital or liquidity may ever be quite enough,” presumably to rescue us from an Armageddon-like financial collapse. My Reuters Breakingviews’ colleague Peter Thal Larsen shares his view here. […]